The Bombay Stock Exchange benchmark index, Sensex, which had lost 439 points in the last two sessions, fell further by 1.21 percent as banking and interest-sensitive sectors` stocks suffered heavy losses.
In the wake of sustained fall in stocks, some investors were forced to cover-up their pending positions as there are only a few days left for the July contract to expire, which further aided the fall.
Concerns over high inflation remained despite food inflation, a major component of WPI inflation coming down to a 20-month low of 7.33 percent for the week-ended July 16.
The wide-based National Stock Exchange index Nifty also took a beating, by losing 59.05 points, or 1.06 percent, to close at 5,487.75.
Stocks of oil and gas, banking, realty, auto and IT firms were under pressure, dragging the Sensex down.
Brokers said continued offloading of stocks by funds ever since the Reserve Bank of India raised lending rates by 50 basis points and fears of further monetary tightening to control inflation, mainly dampened the trading sentiment.
In addition, the negative sentiment persisting in global markets on US debt default worries and concerns over the euro zone crisis also had a negative impact, they said.
The selling pressure was strong enough to absorb impact of a fall in inflation for the week-ended July 16, they added.
Sensex heavyweight Reliance Industries dropped by 2.71 percent to Rs 837.35 and Infosys Technologies fell by 1.74 percent to Rs 2,745.40, extending its four-day slide to 3.1 percent.